Watts Water Misses Earnings Estimate (BMI) (NANO) (ROP) (WTS)

Watts Water Technologies, Inc. (WTS) reported first-quarter 2013 adjusted earnings of 49 cents per share, up 14% year over year, driven by higher sales in North America and Asia, cost reductions in North America and EMEA as well as share repurchases. Earnings, however, fell short of the Zacks Consensus Estimate of 57 cents by 14%.

On a reported basis, including special items, earnings in the quarter were 45 cents per share compared with 42 cents in the year-ago quarter.

Total revenue remained flat year over year at $362 million, beating the Zacks Consensus Estimate of $358 million. Given the favorable foreign exchange impact, growth from acquisitions as well as organic growth in North America and Asia were mitigated by lower organic growth in the Europe, Middle East and Africa (EMEA) segment, primarily in the France and German markets.

Cost and Margins

Cost of sales remained flat at $233 million in the quarter. Gross profit inched up 1% to $129.5 million. Consequently, gross margin expanded 20 basis points (bps) to 35.8% in the quarter. Selling, general and administrative expenses decreased 1% to $99 million. Adjusted operating profit increased 7% to $30.5 million and adjusted operating margin expanded 50 bps to 8.4%.

Segment Performance

North America: Net sales went up 3% to $213 million, aided by acquired sales of $0.7 million and organic sales growth of 2.6%; partially offset by unfavorable foreign currency translation with the weakening of the Canadian dollar against the U.S. dollar. Operating profit increased 21% to $24 million in the quarter.

EMEA: Net sales were $142 million, down 5% on a year-over-year basis as positive impact of foreign currency translation was offset by lower organic sales. The segment reported an operating profit of $10.6 million, down 17% from the year-ago operating income of $10.6 million.

Asia: Net sales increased 34% to $7 million in the quarter. Operating profit more than doubled to $2.9 million from $1.4 million in the prior year quarter, triggered by increased third-party sales and incremental plant absorption.

Financial Updates

Cash and cash equivalents were $251 million as of Mar 31, 2013 compared with $271.8 million as of Dec 31, 2012. Cash flow from operations for the quarter was an outflow of $2.7 million versus an inflow of $3 million in the prior-year quarter.

Long-term debt, excluding current portion, amounted to $306.8 million as of Mar 31, 2013 compared with $307.5 million as of Dec 31, 2012. Net debt-to-capitalization ratio increased to 12.4% as of Mar 31, 2013, compared with 10.7% as of Dec 31, 2012.

Watts Water’s board of directors has authorized the repurchase of up to $90 million of its common stock. The company has also announced a 2 cents per share or an 18% hike in it dividend to 13 cents per share.

Our View

Watts Water has made strategic investments in both people and systems and lead-free conversion program in North America. Even though it has affected near-term results, it will lead to improved margins in the long term. The company will benefit from the residential construction recovery that seems imminent in the U.S. Its focus on growing its business and leveraging the substantial market expansion opportunities in Asia will add to its growth profile. However, weak economic condition in Europe is still a headwind for the company.

Watts Water, through its subsidiaries, is a world leader in the manufacture of innovative products to control the efficiency, safety, and quality of water within applications (residential, commercial, and institutional). Watts Water retains a Zacks Rank #4 (Sell).

Peer Performance

Badger Meter Inc. (BMI) reported first-quarter earnings per share of 20 cents, down significantly from 42 cents earned in the year-ago quarter and was well short of the Zacks Consensus Estimate of 48 cents.

Roper Industries Inc. (ROP) reported earnings of $1.27 per share, up 16.5% from the year-ago quarter and ahead of the Zacks Consensus Estimate of $1.22.

On the other hand, Nanometrics Incorporated (NANO) reported first quarter los per share of 22 cents compared with a prior year earnings per share of 12 cents but narrower than the Zacks Consensus Estimate of a loss per share of 27 cents.